Tuesday, March 15, 2011

Disintegrating Japan and the Future of the United States:Taxes and the Debt Ceiling

Continuing yesterday's discussion on what the United States needs to do to prepare for the future in light of the disaster in Japan: Energy and Oil

Japan's economy will be offline for awhile meaning that it's purchases of foreign goods and materials will be severely diminished.  However, so will their capacity to manufacture goods along with their soon to be on going power issues from defunct nuclear power plants.  The United States needs to prepare, not just for the down turn or general change in the world economy, but to fill the needs that will arise as well as those that will arise from the future rebuilding.  Further, there is a probability, based on historical context, that this could bring about a new era of technology, structural engineering and materials.  

Currently, as Japan's economy is offline and the disaster is ongoing, so is Japan's demand for oil, diesel and gasoline.  However, without their nuclear reactors, they are going to need to switch up their power generation, most likely to coal and diesel fuel power plants.  Further, several refineries have been damaged or destroyed.  Where is the oil going to come from?  If it is simply taken out of the current supply system, the cost of oil, thus gasoline and diesel, will rise even further.  Second, where will the additional refining capacity come from?  

In the short run, current production and refining capacity will be hard pressed to fill the need.  An ongoing result of Middle East "unrest", pirates in the Arabian and Red Sea and our own policies that have decreased production and decimated refining capacity make it nearly impossible.  In the long term, we need to adjust our policies now to address those needs and stabilize oil and fuel prices to insure future economic growth.  Dumping US oil reserves into the market doesn't help at all.

At the same time, the US needs to prepare for a future of increased manufacturing and development of technology.  If we do not do it, another nation will and since the second largest economy is now China that will likely be China.  Putting China well on the way to becoming the number one economy as it has already reached the number one position in manufacturing.  As this report in 2006 suggests, one of the issues facing America is that it cannot compete with China's cheap labor or business oriented government.  We are also behind the line in regards to investing in research and development as well as educating scientists and engineers.

However, the United States currently has an official 8.9% unemployment (hovering around 9 million)  and an unofficial unemployment (in other words, those not filing claims anymore) is probably closer to 12% (close to twelve million or more).  That is a huge number of potential workers available for the development and manufacturing of necessary materials, products and technology, not only for the development of a new Japan, but for the continued growth of the United States economy and its advancement into the future of technology.

In order to move our economy forward, improve tax revenues to offset current debts, improve potential lending and re-orient our federal government to be more business friendly, the United States needs to do several things.

First, as both a short term and a long term re-establishment of the US as a business and investment friendly nation, congress and the president needs to re-assess the US tax code.  Currently, the United States corporate tax code is the second highest behind...Japan.  

It is very simple.  Businesses are set up to provide profits to its owners and dividends to its investors.  Taxes take an aggregated average of 39.2% of corporate revenue.  That is before profits are realized. This reduces the revenue left for everything else.  Not just profits and dividends, something that would surely keep any investor or owner/operator from considering development here in the US, but it reduces revenue left for paying employees, maintaining properties or expansion, capital investments in equipment or even purchasing products or materials from other companies that would also fuel employment, is hampered if not severely stagnated.

Add to that the current administration and Congress's health care bill that, on aggregate, proposes to add another $4,000 in benefit costs per employee to every company's ledger.  It does not take a Wharton School of Business graduate to know that, unless that company is a favored government industry (such as the new drive towards "renewable energy") that receives more tax credits, subsidies, guaranteed loans or other favorable government legislation that offsets these increases and more, opening a business in the United States is moving closer and closer to the "unprofitable" column.

In return, that decreases tax revenues and increases unemployment that further decreases tax revenues.  It's a vicious cycle that results in long term economic damage, deepens unemployment and slows development.

We cannot simply lower taxes.  United States spending is quickly reaching critical mass where no amount of increased taxes will offset the debt.  Making investment in US bonds and treasuries a non-starter.  There is no profit or interest realized on a country who's GDP can never overcome it's debt.  This is basic business, not just national or international lending practices.  

Investors invest in companies who carry debt every day.  What they are looking for is the potential that the company's future growth of income will be able to pay off that debt and its interest.  Even allowing that company to borrow again, grow again and pay off the next debt.  Even as it pays off the debt in incremental stages, revenue still remains to pay investors and share holders a steady stream of dividends over time.  

What happens if the company takes out major loans for capital investments and build outs, but does not experience the projected growth?  Investors jump ship, loan payments come due and the company, if they are lucky, starts "restructuring" its debt, sells some aspects of its business and revises its budgets to decrease costs.  Usually including lay offs of employees among its several moves.  If it isn't lucky?  Bankruptcy, selling off its assets to competitors that usually results in massive lay offs, etc, etc, etc.  Worse, they may go completely out of business, sell off assets to pay whatever creditors that can collect and then disappear from history.

Of course, a nation is slightly different from a business.  It's potential growth rests on more stable grounds such as available natural resources and it's human assets, it's citizens.  However, that doesn't mean that bad governance can't drive a country into bankruptcy.  Too many expenditures and not enough revenue with government continuing to spend like "drunken sailors" on projects and programs that do not support economic growth (ie, entitlement programs v. developing infrastructure, resources, products or "marketing") results in deficits that do not have offsetting revenue streams.  There are numerous countries right now either on the verge of bankruptcy or doing basically disintegrating economically as this post is written.  

The United States must...MUST review it's budget and expenditures.  It is not incorrect that a government can spend money to help the economy.  The question is, what are the expenditures and how would it help the economy?  Improvements in infrastructure such as roads and even the power grid can help the growth of business which, in turn, increases potential revenues to the government. Investments in social programs for "human assets" can have an impact as well, but they are less tangible and, ultimately, not as direct in providing revenue to pay off creditors.  

The US must be able to show good faith that it is willing to make necessary changes to grow the economy and reduce costs that will allow the US to continue to pay it's creditors back their investments with interest earned or allow them to maintain it as stable, ever more valuable asset in their portfolio.

On the other end of this equation, the US has to consider raising it's "debt ceiling".   In essence, the "debt ceiling" is setting the limit of credit and expenditures that the US is willing to carry and basically guarantees will be paid back. This is a matter of statute.  If the law does not allow the US to carry more "debt", it cannot take any additional loans to build infrastructure or pay off other debts with a higher interest rate than the potential funds that can be at our disposal (ie, potential for lower interest rates, thus, lower over all debt).  

It sounds contradictory to say so, even as we are talking about lowering our spending to improve our "credit rating".  What we are saying is that we believe the US economy will grow to the point where our debt is still more than offset by our assets and potential revenue/income.  

This is especially important if we expect to provide any funds or lend money to Japan for their own rebuilding.  Rebuilding that can lead to growth in the American economy.  However, it can't be completely based on  borrowing money to lend to someone else at a different rate.  We have to build our own funds.  Those must come from two aspects: 1) cutting costs to free up funds for a) paying down our debts, b) improving our infrastructure for the build to our economic, technologically advanced future; 2) cutting taxes to invite business development and investment that ultimately increases tax revenue to pay off debts and future developments.

This is what the United States has needed before the disaster in Japan.  Now that the destruction has occurred, the United States must put it's financial house in order to step into the breach as well as lend support to our friend and ally.  

To do less would not only place that ally in jeopardy, but would risk the future of the United States and all its allies in freedom. 


No comments: